Managed futures 101: the quest for crisis alpha
The investment strategy du jour is factor investing or more commonly known as ‘smart beta.’ However last year prior to the smart beta boom, liquid alternatives, or liquid alts were all the rage. If nothing else it teaches us that Wall Street has a penchant to pile into nascent investment trends.
One liquid alt fund type that is worth further consideration are managed futures. One of the attractions of managed futures is that they historically had a tendency to provide strong returns during periods of stock market crisis. This ‘crisis alpha’ is somewhat unique among traditional asset classes. This may be due in part the fact that the majority of managed futures strategies in form or fashion practice trend following or time-series momentum.
You can read more about ‘crisis alpha’ in this paper by Kathryn M. Kaminksi entitled “In Search of Crisis Alpha: A Short Guide to Investing in Managed Futures.” In addition you can hear her discuss this and more with Michael Covel in this episode of Trendfollowing Radio. That isn’t to say that managed futures are the only asset that has historically provide some crisis alpha.
Wes Gray at Alpha Architect explores how US Treasury bonds, various hedge fund factors and managed futures have performed during substantial S&P 500 drawdowns. He concludes:
Historically, Treasury Bonds, Hedge Fund Factors, and Managed Futures have all managed to act like portfolio insurance, even though they aren’t traditionally considered insurance assets. Will this pattern continue in the future? Who knows…and of course, that is the million dollar question…
In the most recent edition of Modern Trader magazine there are a series of articles that provide readers with a great introduction to managed futures. Now is an interesting time for managed futures because managers are making a concerted effort to break into the mutual fund space. Prior to this managed futures had been a creature of CTAs or commodity trading advisor accounts or funds. Below you can see the growth in assets managed in managed futures mutual funds.
Source: Modern Trader
For those interested in reader more below are links to four articles from Modern Trader that discuss the current state of managed futures investing. In particular I enjoyed reading more about how AQR goes about implementing trendfollowing with futures and how Jerry Parker of Chesapeake Capital sees going forward for managed futures. Below are links to the relevant articles:
- AQR: New era, new leaders
- Chesapeake Capital: The evolution of managed futures from the eyes of a turtle
- Trend following beta
- SEC crashes alternative 40-Act party
Like the aforementioned smart beta strategies, there is no hidden magic in managed futures strategies. Like all strategies they have upsides and downsides. The key is understanding the particulars of managed future and how they might (or might not) fit into your portfolio.